UK growth forecast upgraded but energy prices and rates to hit in 2027
IMF lifts UK growth outlook for 2026 as 2027 pressures build
Constantvpn.com – The UK is expected to grow faster in 2026 than previously anticipated, although the improvement may be short-lived as energy costs and higher long-term borrowing rates are projected to weigh on households and businesses in 2027.
The International Monetary Fund now expects the British economy to expand by 1.3% in 2026. That is an increase from its July estimate of 1%. The outlook then weakens to growth of 1.2% in 2027, reflecting the expected effect of more expensive energy and elevated interest rates on consumer spending and company investment.
Economic forecasts should be treated as estimates rather than guarantees. They can change quickly when events alter energy markets, trade, financial conditions or confidence. The IMF said economies around the world had shown greater resilience than expected following the energy-price shock linked to the US-Iran war, while warning that the wider economic consequences of the conflict remain highly uncertain.
Stronger position within the G7
The revised forecast would put the UK alongside Germany as the second-fastest-growing economy in the G7 for 2026. Growth matters because expanding output can encourage firms to invest, support hiring and improve average living standards. When activity stalls or contracts, businesses may delay investment and households can become more cautious with their money.
John Healey said conflicts in the Middle East and Europe were affecting people in Britain and elsewhere, but argued that the economy had demonstrated resilience internationally.
“Britain's economy is showing strong international resilience”.
The chancellor is preparing tax and spending plans for Andy Burnham’s new-look government, with the Budget due on 28 October. He has said the government will seek to give households “some breathing space” through its Budget decisions.
Those choices come at a difficult time for public finances. Government borrowing costs have risen sharply, increasing pressure on the chancellor to present plans that financial markets consider credible. The UK depends on those markets when it borrows, and higher interest rates can make servicing public debt more expensive.
Debt and borrowing remain central to the Budget
The IMF considers the UK to be among the few major economies expected to stabilise its national debt. It also projects that Britain will have the lowest annual borrowing among G7 members by 2031.
Silvana Tenreyro, the IMF’s chief economist, said the UK had already started the process of bringing its fiscal position under control.
“As you know, the UK has already started the consolidation process and it is the country that basically stands out, along with India”.
Asked whether Britain was among the countries being urged to cut borrowing, Tenreyro said the adjustment was already under way and that the country should “stay the course”. The IMF has repeatedly encouraged advanced economies to reduce borrowing and curb debt levels where possible.
Sir Howard Davies, a former deputy governor of the Bank of England, described the improved 2026 projection as better than it could have been, but noted that the forecast for the following year was less encouraging. In March, the Office for Budget Responsibility predicted growth of 1.6% for next year. The IMF is now forecasting 1.2% for 2027.
The OBR is preparing a fresh assessment that will underpin the chancellor’s Budget decisions. Its forecasts are particularly important because they help determine whether the government is on course to meet its fiscal rules and how much room it has for tax changes, public spending commitments or support measures.
Global rates could shape the UK outlook
Davies argued that the UK is not the central issue for the global economy, pointing instead to the scale of US borrowing. He said large deficits in the United States were contributing to pressure on interest rates internationally, with consequences for Britain as well.
“That is what is putting pressure on interest rates all over the world and that is what is affecting us as well. Unless the US does something about its deficit, we can expect interest rates to be higher, which of course increases our debt interest costs,” he said.
Higher long-term rates have a broad effect. They can raise the cost of financing government debt, influence mortgage pricing and make it more expensive for companies to fund expansion. Combined with costly energy, that can leave families with less spare income and make businesses less willing to invest.
Davies also suggested the IMF forecast may be allowing for tax rises that the government ultimately does not introduce. Economists have estimated that Healey may need to find £35bn if he is to avoid public-spending reductions while also honouring defence commitments in his first Budget.
The Resolution Foundation has called for repairs to the public finances while stressing the need for carefully targeted help for people struggling to heat their homes. Andrew Griffith, the Conservative shadow chancellor, said further tax rises would mean slower growth and would leave working people paying the price.
Burnham has promised “good growth in every postcode” through plans intended to give nations and regions greater control. However, the approach has drawn criticism from within his own party. The coming Budget will show how the government intends to balance that ambition with the need to contain borrowing, respond to higher living costs and protect confidence in the public finances.
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